Q4 2022 Cars.com Inc Earnings Call
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Okay.
Please standby will be starting in just a moment.
Quarter total operating expenses were $148 million compared to $154 million in the prior year on an adjusted basis operating expenses increased by $4 million or 3% year over year.
This increase was primarily due to higher sales investments as we added staff to support our new product launches.
<unk> Entertainment and bad debt expense were also higher the ladder somewhat elevated after particularly low bad debt in 2021. Additionally.
Additionally, product and technology expenses increased due to the acquisition development and launch of our accu trade in credit ICU products.
Net income for the quarter was $10 million.
Compared to a net loss of $3 million in the prior year.
Adjusted EBITDA for the quarter totaled $49 5 million to $7 million higher than the prior year. Adjusted EBITDA reflects our revenue growth, partially offset by increased operating investments across the organization to support the development launch and sale of our new products.
Adjusted EBIT margin for the quarter was 29, 4% and was in line with the prior year.
Before I turn to our full year results I'd like to take a moment to review our key operating metrics and trends.
We ended the quarter with 19506 dealer customers, an increase of 327 or 2% compared to the prior year, but 79 lower on a sequential basis.
Dealer customers would have increased sequentially, if not for the cancellation stemming from struggling digital dealers pulling back lifting from virtual locations.
Recall, we were impacted earlier in 2022 by cancellations from another large digital dealer excluding cancellation from these digital dealers our dealer customer growth was 4% year over year.
Looking at our dealer customer base as a whole we are very pleased with our continued strong retention rates, particularly in this current lean inventory environment. It is a testament to our value delivery and the fourth quarter was the highest quarter of marketplace customer additions in 2022.
Our PD or other key driver of revenue increased by $28 to $2361 in the fourth quarter fueled by continued adoption of our solutions.
As Alex mentioned dealer inspire had another solid quarter and revenue grew 28% compared to the prior year.
While we expect to continue to grow our website customers. We are also increasingly focused on growing package value and in our PD.
Underpinning the strength of our platform is our ability to consistently generate unique high quality traffic and an engaged audience for dealers and Oems for the quarter were 25 million average monthly unique visitors and delivered 140 million visits both increasing 5% as.
Third to the prior year.
Now moving to our full year 2022 performance revenue totaled $654 million and Hela revenue was $579 million, both were up 5% compared to the prior year.
Total operating expenses for the year were $588 million compared to $575 million last year.
Adjusted operating expenses were $20 million higher compared to last year, which reflects higher marketing and sales and product and technology costs.
Our sales expense increased due to higher compensation costs as we added staff to support our new product launches. We also had higher marketing expenses as we made investments to raise awareness of our new products and incurred additional costs associated with the return of in person customer about like any D. A.
Our marketing investments support our entire platform as Alex mentioned earlier, our first party audience data supports our media solutions like fuel and cars social. These investments also strengthen our digital solutions consumers, who visit cars dot com are increasingly reading and writing reviews completing credit.
<unk> and becoming a more qualified lead for our dealer customers as long as we're putting instant cash offers and investment in marketing is not just an investment in the cars dot com marketplace. It is an investment in our platform.
Product and technology expenses also increased primarily to support the acquisition development and launch of Accu trade in credit IQ products. These increases were partially offset by lower depreciation and amortization.
Moving to cash flow.
During the year, we leveraged our strong cash generation to make internal value accretive investments acquire and integrate our acquisitions and repurchase shares all while paying down debt.
Net cash provided by operating activities totaled $129 million for the year and free cash flow was $109 million $10 million lower compared to the prior year. This decline was primarily due to a onetime $9 million income tax refunds received in the first quarter of 2021 related to the carry back.
Of the Nols.
During the year, we repaid $41 million of debt repaying nearly all of the outstanding associated with the Accu trade acquisition and bringing our total debt to $481 million at year end.
Of this 83% or $400 million of our total debt is fixed rate six and three eight senior notes maturing in 2028.
With our debt Paydown net leverage improved to two four times compared to two six times as of September 32022, and we are now squarely back within our target range of two to two and a half times.
Our strong cash flow generation enabled us to execute a balanced capital allocation strategy, which includes returning capital to shareholders. During 2022, we purchased four 2 million shares or 6% of total shares outstanding at the start of the year.
As of December 31st 2022, you have $151 million remaining on our share repurchase authorization, which has two years left overall.
Overall, our liquidity remains strong with $215 million available on our revolver and $32 million of cash on hand, you can trust that we will continue to be judicious in the deployment of our capital.
Now turning to our guidance our diversified revenue streams give us a solid foundation to deliver another year of profitable growth, we expect to deliver first quarter revenue of $166 million to $168 million or year over year revenue growth of 5% to 6%.
Our first quarter revenue outlook assumes a continued pullback by digital dealers and lower OEM and national advertising spend relative to the fourth quarter of last year.
Looking ahead, there continues to be mixed signals across the automotive industry driven largely by continued supply chain challenges.
While we have solid near term visibility in this current environment, there is less certainty longer term.
This is reflected in our full year revenue guidance, which calls for year over year growth, but with a wider range of 3% to 6%.
Our full year guidance reflects the expectation of continued strong growth in dealer revenue tempered by the lapping of the Accu trade acquisition in March and continued digital dealer software.
We expect lower inventory levels will also persist throughout the year, which impacts our customers' advertising spend.
Despite recent increases in the average daily vehicle listings on our marketplace overall lifting remain down 41% compared to $4 3 million as of the first quarter of 2020.
Our growth expectations would be higher in a less constrained inventory environment.
I'm pleased that we have maintained a strong and consistent adjusted EBITDA margin profile reflective of our disciplined approach to capital allocation and incremental investments our ROI driven approach to investing has enabled us to maintain strong margins, even as we scale new products like accu trade and Craig.
Our Q, which typically require upfront investment prior to launch.
With that as a backdrop, we anticipate adjusted EBITDA margin for the first quarter to be between 25 and 27%.
Once again anticipate margins to improve over the course of the year and expect to exit the fourth quarter of 2023 with margins approaching 30%.
Paul we typically make seasonally higher investments in marketing and sales in the first quarter due to the timing of in person industry event and this year is no exception.
Capital expenditures for the year are expected to range between 22, and $25 million and we expect cash taxes of approximately $10 million, which includes payments related to both the 2022 and 2023 period.
Bill we expect to deliver yet another year of strong free cash flow.
In summary, our solid performance reflects the strength of our integrated platform, which enables us to innovate and better serve consumers and customers, while delivering profitable growth. We enter 2023 with the financial flexibility to continue making value accretive investments and create long term value for shareholders.
With that I'd like to open up the call for Q&A operator.
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And our first question today will come from Tom White with D. A Davidson.
Great. Thanks for taking my question. Most ended the year guys. Two if I could maybe one for Alex and one for Sony on the guidance.
I was hoping maybe you could just characterize what.
The user engagement trends that you guys are seeing or kind of telling you maybe about the underlying customer demand for vehicles, how that's holding up kind of in the face of <unk>.
<unk> pressure and rising interest rates, a 5% growth and it makes the traffic in the quarter, which just customer demand is pretty healthy, but just curious what you guys are seeing and then Sonya on the guidance.
<unk> revenue, 5% to 6% revenue growth for the first quarter three to six for the year can you just help us understand what would drive a slowdown in the business over the balance of the year.
Its inventories and an OEM spend is kind of only likely to improve.
From from current levels.
Over the next few quarters.
Thank you.
Sure Tom Thanks, Thanks for joining US look we have experienced a lot of positivity regarding user trends and those trends continue into 2023.
We're seeing persistent demand.
On the organic side, which is allowing us to be more judicious with our paid media and so we see a strong healthy market, particularly on the used car side. I think we also are seeing a lot of pent up demand for EV interest or EV search traffic continues to decline with the introduction of a lot of new products coming to me.
But more importantly to consumer interest in those makes and models.
And so we feel really front footed and we're seeing strong value delivery and lead flow to our customers.
We hope that persist through the first half of this year and importantly, as we saw last year with limited inventory supply.
It naturally drives users to marketplaces, because they can search geographically wide and don't have to reside on the vehicles that are available in their backyard and so I think thats, partly what contributed to our strong traffic trends last year and carry forward into this year.
Yeah, and then maybe picking up on the guidance question. We are really excited about our Q1 outlook with 5% to 6% growth.
I as I sort of tried to highlight in our opening remarks.
Longer term visibility tends to just be a little bit more challenging in this current environment, yes inventory levels have been increasing but off of an extremely low base right. So even when you look at where we landed for the end of the year and compare that back to even Q1 of 2021 are going back further to 2022.
We have a long way to go to build back and again in our subscription business. It does take time to lap the benefits of those subscription. So I think I think that that's really what's reflected in the in the low end of the range, but overall, if we take a look to get that back to look at the full year.
Expecting continued strong growth coming from like our our dealer revenue I think there there's sort of two two things I would call out that maybe temper that a little bit I think as you're aware there are a number of digital dealers out there who have been experiencing softness in their own business if they fit.
You're out what what model works best for them, we've seen some pullback on our site I think we started talking about that in Q2 of last year and so our guidance factors in and it is effectively trying to derisk for our challenges those digital dealers are likely to continue to experience.
And then we're also lapping B Accu trade acquisition, beginning in March which is going to have a little bit of an impact as you think about the year over year growth and finally as I mentioned continued lower inventory levels put pressure on advertising budgets for some of our customers who may not be getting b.
Growth that we want on the lower end of the range. So again trying to provide something that's a little bit more derisked, but obviously our range is built around a forecast that takes into account, both upsides and downsides to the business.
But that's great Super helpful. And then just one quick follow up on the 2023 kind of EBITDA margin ramp you guys described in the press release it seems like.
It may evolve kind of very similar till last year. I mean can we think about sort of margins being flat on a year over year basis is sort of a baseline or should we think otherwise.
No I think they well, but in general yes, they're evolving a similarly to the way. They did last year again, the caveat is simply that the the longer term visibility return of some of that higher margin OEM revenue is a little bit difficult to protect which is why we provided guidance in this fashion.
Okay. Thanks, guys appreciate it.
Okay.
And our next question will come from Gary <unk> with Barrington Research.
Yeah.
Hey, good morning, everyone.
Critical questions here.
I can understand what's going on with the digital dealers, but I guess I guess for all of us we'd like to know.
Just how many of these dealers do you still have that are still in existence.
Are you assuming that further cancellations from some of these digital dealers because they're just running into issues with their business models.
Yeah. So the short answer is yes, we do expect further further cancellations.
Coming in in Q1, our guidance for both the quarter and the full year factors factors. This in.
Okay, I think I think that's important to know though is like despite despite the fact that we have been experiencing cancels from digital dealer or the overall traditional dealer base continues to be extremely strong you know if not for the cancellations that we were experiencing with digital dealers instead of 2% year over year growth in dealer customers, we would've seen.
4% year over year growth in dealer customers that's right.
Right.
And you can do about that I just wanted to.
Get an idea of what could happen going forward and then in terms of these digital dealers are they just basically buying the marketplace listing services, they're not buying anything.
The high end digital solutions I would assume they have most of those in house right.
So.
Average revenue per dealer is not that great.
Correct, it's only really impacting our marketplace subscription counts and Eric E. There.
Most of their technologies in house.
Okay.
And then Alex could you maybe talk about you just came out and add up what are some of the observations you made there what were the dealers basically asking for from from cars Dot com in terms of.
The technology solutions things like that can you, maybe just elaborate a little bit on that.
Sure Gary what we just got back from the show in Dallas in most of the industry trade publications heralded cars as being one of the big hits of the show our Booth was absolutely packed with dealers interested and the innovations that we're doing on the marketplace with our new experience report, giving them feedback on how they're structured.
<unk> are performing.
And then also a lot of interest in Accu trade dealers now have heard enough from their counterparts that this is changing the game for them and so we had far more dealers leaning into what we're doing to help them buy cars more efficiently and through alternative means and so by and large it was a very successful show we've talked to over 1000.
Dealers in a period of just a couple of days and.
There was a lot of fun as well.
Okay, but there is still very interested in digital solutions.
Without a doubt.
Okay, Gary might take was it felt more like a software convention than a car show I mean, most of the companies. There we're trying to advent towards digital solutions as you know we've led here.
We're ahead of our peer group and so we're seeing competitors.
Try to demonstrate their digital prowess, but thats.
Our DNA and dealers know that they can count on us as the leader here.
Okay. Thank you.
Yes.
Uh huh.
And our next question today will come from Marvin Fong with B T I D.
Hi, good morning, Thanks for taking my questions and congratulations on the.
25 years, Alex I know you've been there since the beginning.
<unk>.
I thought.
Maybe to build on the what you were talking about with a 4% growth excluding digital dealers. So could you share with us what that has been in prior quarters with a 4% kind of consistent with prior quarters or was that an acceleration.
And then I have a follow up.
Revenue growth accelerated each quarter throughout 2022.
Yeah, I think I think Marvin are you are you referring to the comment I made about digital dealers and the impact they had on dealer calls.
Like the dealer growth if you excluded digital dealers the impact of that I think you said was up 4% in the quarter year over year.
Got it.
An improvement from what you've seen in prior quarters.
Same basis, if you exclude those deals.
Oh from prior year as well, we've only really started I'd say in Q2 experiencing.
Cancellations from some of these digital dealers.
One thing to bear in mind is that in terms of overall marketplace ads.
Q4 was with one with our strongest quarter of the year.
I don't I don't think Theres anything.
I'm, sorry, if I'm not answering your question correctly.
Generally speaking the growth is it similar or if you exclude some of our.
Digital dealer cancellations.
Okay, No problem and then.
On the dealer inspire so it looks like there was a substantial pick up in growth, even though the dealer count.
We're doing it didn't rise as much so could you kind of.
First part just kind of.
Break down why the it looks like the revenue per dealer rose. So much and then my second part of that question is historically I think.
Revenue, just kind of build quarter over quarter is that much like.
Up and down to it throughout the year. So should we kind of consider that the new revenue level that you saw in the fourth quarter kind of the baseline that you can build off of.
For 2023.
<unk>.
So there were a couple of drivers for that sequential pickup in year over year growth from Q3 to Q4, obviously it always helps that we are continuing to launch.
<unk> websites I think you've also heard us talk about efforts to focus on just the overall package value.
That dealers are signing up for between the website add on and what we can how we can bundle our products together.
So pricing has definitely also been a focus of ours as we as we continue to grow this business and thats something that factored into the increased growth that you saw in Q4, and then finally, what I would say is I think most folks on the color of you are aware. We also have this advertising business digital advertising business.
That fits within.
D I and we've seen continued momentum in that business, which continues to kind of buoy. The overall growth of dealer inspire. So those are some of the factors contributing I don't think there are any.
One time items in the Q4 revenue number that would.
Makes me not want to use this as a base for how we think about our go forward revenue growth for the business.
And then okay.
And in particular, maybe slightly elevated relative to what you should be assuming in the future if that makes sense.
Yeah, you're right I was thinking more from a dollar perspective.
And if I could just sneak one other one on accu trade I think I think last quarter you had about 430 dealers now it's 500.
We feel about the pipeline there I know it takes time to actually activate.
Dealers. So you might have more of the pipeline, reflecting an excellent counts. So maybe you can just kind of comment on.
The growth trajectory, we should expect for 2023.
An accu trade. Thank you.
Yes, so Margaret I would say I'm going to connect to your questions I think first and foremost despite the loss of digital dealers Youll see in our numbers that we grew dealer count and ARPG.
And certainly our solution strategy is the chief reason for that strong <unk> growth in Accu trade is a big part of that.
The dealer engagement area has been very strong.
As you know that dealer net new spending in Q4 tends to be softer just because dealers are curbing expenditures for year end.
And that we did see a shift for dealers to more on Onboarding and.
In Q4, where we really wanted to make sure that the dealers signed up understood. The value got accu trade on their website showed them how to do appraisals in store.
And so we've invested in talent to help dealers with utilization and being successful our pipeline here is healthy and strong and if you look at just accu trade as a.
The line item within our revenue our average revenue per dealer, it's one of the fastest growing streams that we've got and we're anticipating that trend to continue through 2023 I would just add.
A N a D E and talking about our solutions with dealer was one of the topics that regularly came up is they may have tried it in one or two stores, how do they now shifted to the broader set.
Set of dealerships that they own. So I think we are seeing really fantastic interest and engagement I think Alex shared some of the numbers.
It's like over 600000 appraisals.
For the year, and even with our IPO offering which is a little bit more oriented towards consumers coming to our marketplace. That's been a partial year I think it launched in May we've also seen tremendous activity. There. So it's a combination of both driving engagement of the <unk>.
Product, which is going to create the best evangelism I think out there to bring more dealer customers to the platform and then continuing to execute on the pipeline of dealers that we have.
That's perfect. Thanks, so much for the color Alex.
David.
Thank you Mark.
Yes.
And as a reminder, if you would like to ask a question you may say well by pressing star one on your telephone keypad now.
We will now take a follow up question from Gary <unk> with Barrington Research.
Okay.
Yes, I just wanted to ask about the national advertising revenue I think you said, San you're you're kind of looking for it to be very similar actually similar to Q4 and Q1.
Is that right.
No we expect it to be down in Q1 versus Q4.
Pay down.
Couple of kind of a range for that.
A couple of reasons for why we think it's going to be down sequentially. We did.
We do see some of the Oems starting the year with a little bit more cautious footing.
And that that's part of it the other the other thing is we do have within that national and OEM line, a handful of insurance company, but also do work for us.
Buy advertising from us and as you can imagine.
<unk> been struggling a little bit with <unk>.
Their experiences through this less claims cycle that <unk> gone through so those are two other factors.
Impacting impacting Q1.
Okay.
Sure.
As we go forward as the industry starts to.
Puts out as they said it was going to this year, where we're going to have about a 500 dollar increase in vehicle build would you anticipate that that would go up sequentially.
Sequentially or has something changed on a secular basis, there that where the Oems are going to not be using that.
Mechanism as much as they had in the past.
Okay.
So I do think that.
As AD inventory levels increase specifically.
Specifically on the lot inventory levels increase as new model launches actually come to market, which has continued to be slower than anyone ever anticipated.
We will we will start seeing an uptick right, but they do their planning well in advance.
It does take time to catch up catch up to the cycle and again I just point out that while we're excited about what we see happening on our marketplace in terms of the number of lifting.
It's still it's still considerably down versus recent past and so there is a build back that needs to happen, it's going to take time no. One thought this chip shortage is going to last as long as it has.
But no I do think I do think revenue will come back and OEM and national without a doubt, but it will be back loaded Gary which then for the full year.
Minimal impact on our full year.
And we do see the trends are improving but it's largely going to be in the second half of this year. So it sets up nicely for 2024.
Okay. Thank you.
And our next question today comes from Doug Arthur with Huber Research.
Hey, good morning, Sonya just on this dealer customer count being down sequentially.
I'm wondering if you can just sort of disentangle.
Traditional dealers digital dealers accu trade ads dealer inspire adds because it seems like.
There's a number of different vectors going on here.
So I'm wondering if you can just help me with that.
Yeah. So I think I think what I can tell you is that if not for digital dealer cancellations that we experienced in Q4 overall, our dealer customer additions.
<unk> would have been positive.
So that's really the primary driver and marketplace also would have been up if not for those cancellations.
Okay. So it was a pretty pretty significant number then basically.
Yes, you can think of digital dealers is really being sort of like the size of a large dealer groups based on how they manage their virtual locations and the geographies they want to participate in <unk>.
And bear in mind, the accu trade when we add accu trade accu trade connected is about.
Cross platform experiences. So those accu trade ads are not necessarily going to increase our dealer count.
Okay. That's helpful. Okay. Thank you very much.
Thank you Doug.
And as a final reminder, if you would like to ask a question. Please signal by pressing star one at this time.
I will pause just for a moment to allow everyone an opportunity to signal.
Okay.
There are no further questions at this time I'd like to turn the call back to Alex Vetter for closing remarks.
Thank you we want to thank everybody for your interest in cars and want to mentioned that on March 6th we will participate in the Jpmorgan High yield conference and we will keep you posted on other investor engagements throughout 2023. This concludes our call. Thank you very much for joining us today.
And this does conclude today's conference call. Thank you for attending.
Yeah.
<unk> has ended this call goodbye.
Okay.